Five cleared in San Diego pension case

Federal judge: All criminal charges dismissed against former officials

OVERVIEW

Background: San Diego in 2002 increased retirement benefits for city employees. Prosecutors said the increase was designed to win support of pension board members for eased city pension payments.

What’s changing: A federal judge dismissed a case against five former city and pension fund officials, and a state judge ruled that the city does not have to make a $177 million make-up payment.

What’s next: Both cases could be appealed.

CASE STUDIES

The U.S. Supreme Court is currently weighing three cases that concern the honest services fraud law. The law prohibits a person from depriving someone else of “the intangible right of honest services.”

Chicago: A jury convicted former newspaper mogul Conrad Black of defrauding investors by channeling corporate funds for his own personal use. His case turns on whether the law can be used against a private individual whose fraud did not harm the company.

Anchorage, Alaska: Former state legislator and lawyer Bruce Weyhrauch is charged with breaking the law when he solicited legal work from a major oil firm while the legislature was weighing a tax bill that would affect the company. His case turns on whether the law can be used against a state official, when no state law was violated.

Houston: Former Enron Chief Jeffrey Skilling was convicted in 2006. He argues the law can’t be applied to him because he did not act out of “personal gain” but to boost the share price of Enron.

The charge was used successfully against former Rep. Randy “Duke” Cunningham, who pleaded guilty to it on Nov. 28, 2005.

$177 million Lump sum the pension system was seeking to make up for past underfunding

A federal judge has dismissed all criminal charges against five former San Diego pension system members whose willingness to grant fiscal relief to the city in 2002 backfired and pushed it to the brink of bankruptcy.

The ruling posted yesterday exonerates the former city and pension officials after four years of federal court proceedings.

“I’m very pleased,” said defendant Cathy Lexin, a former city employee who now works in the private sector in Sacramento. “I’ve never doubted this outcome, and I said that to people from the very beginning.”

Cleared in the case were Ronald Saathoff, former head of the city firefighters union; Teresa Webster, a former city employee; Lawrence Grissom and Loraine Chapin, former pension system officials; and Lexin.

While the ruling may close a significant chapter in the city’s long-running pension dispute, San Diego remains in an unstable financial position, forced to make sweeping cuts in services such as fire protection while making larger and larger payments to its pension system.

The city’s money problems could have been a lot worse had it not been for an unrelated legal ruling announced yesterday.

City Attorney Jan Goldsmith said a Superior Court judge last month ruled that the city did not have to make a $177 million lump sum payment into the pension fund as retirement administrators had sought in order to make up for past underfunding decisions.

Judge Jeffrey Barton ruled that the city doesn’t have to pay the lump sum because the pension system did not follow the city charter in seeking the money.

The city’s chief operating officer, Jay Goldstone, said the city had no way to pay that amount — and would have had to make wholesale transfers of city property to the pension system.

Glen Sparrow, professor emeritus of the school of public affairs at San Diego State University, said it will take the city years before it “reasserts itself as a viable financial entity.”

“I think it’s lost that sense of legitimacy,” Sparrow said.

Yesterday’s federal court ruling is the second setback this year for prosecutors who had charged city and pension officials with criminal wrongdoing. The allegation was that the pension board agreed to accept lower city contributions to the pension fund, in return for sweetening of benefits. The decisions still cost taxpayers today, as the city is making up the underfunding and paying for the higher benefits.

In January, the state Supreme Court dismissed similar charges against five former pension board members. including Lexin and Webster. The San Diego County District Attorney’s Office prosecuted the criminal conflict-of-interest case. The state high court allowed charges against Saathoff to proceed.

John Kaheny, a former 22-year employee of the San Diego City Attorney’s Office and critic of the pension prosecutions, took little comfort from yesterday’s federal court decision.

“The trail of personal destruction is outrageous,” Kaheny said. “You’ve now got seven California Supreme Court justices and a federal court judge all saying this is a bunch of hooey.”

In a 28-page ruling, U.S. District Judge Roger Benitez said the law under which the five officials were charged is too vague. Benitez found that the federal honest services fraud law “failed to give these defendants fair warning that their conduct could violate the federal mail and wire fraud statutes.”

The charges centered on a sequence of events in 2002 and 2003 that contributed to the city’s pension deficit. Prosecutors contend that the defendants supported a city plan to put less money into the retirement system than needed in return for enhanced retirement benefits and a special retirement benefit for Saathoff.

Federal prosecutors had said that amounted to a violation of a law that makes it a crime for public officials to deprive citizens of the officials’ honest public services.

In numerous hearings over the past four years, Benitez has pointedly questioned prosecutors about why they brought the case and voiced his own doubts as to whether the defendants should face criminal charges.

“To be clear, when our public officials misuse their positions for pure self-enrichment or to flout the law, they deserve to be prosecuted,” his ruling says. “However, these defendants are not being charged with accepting a secret bribe, or taking an under-the-table kickback, or extortion, or directing a city contract to a family-run business. Nothing of that sort.”

Benitez wrote that the city’s plan to increase pension benefits if the pension board approved a lower city payment into the pension system was, in hindsight, “a bad fiscal idea.”

But, he added, “If it was a bad idea, it was the city’s bad idea first.”

Benitez’s ruling was a welcome surprise to defense lawyers and their clients. They had asked him to dismiss the case months ago.

Because the U.S. Supreme Court is hearing three cases relating to the honest-services fraud law, most believed the judge would wait until the high court ruled before weighing in on the San Diego pension case.

Frank Vecchione, Webster’s lawyer, said the ruling clears his client entirely after more than four years in state and federal courts.

“This is total vindication for Teresa Webster,” Vecchione said. “Both cases dismissed. And two different courts found her actions to be perfectly legal.”

The U.S. Attorney’s Office said in a statement that it was “evaluating its various options and future course” in light of Benitez’s ruling, and the pending cases in front of the U.S Supreme Court.

Accountant April Boling, the former chairwoman of the city’s pension reform committee, said there’s no longer any reason to point fingers.

“We still have a $2 billion pension debt,” Boling said. “The outcome of that case was never going to change the situation in the city of San Diego’s pension system. It’s not as though finding them guilty was somehow going to make a billion of that go away.”

Former San Diego City Attorney Michael Aguirre, whose one term in office was focused largely on a mission to roll back pension benefits he deemed illegal, said he respectfully disagrees with Benitez and expects an appeal.

“You would think that at the very time when the consequences of corruption are so pervasively apparent in San Diego and elsewhere that the legal system would be responding accordingly,” Aguirre said. “It’s lagging behind.”

The state and federal cases were not the only prosecutions involving the underfunding.

Five former city officials also stand accused by the federal Securities and Exchange Commission of failing to disclose the scope of city pension and retiree health obligations in municipal bond offerings. That civil case has been whittled down from a “scheme to defraud” to negligent misrepresentations or omissions, and a settlement seemed near as of January. The complaint was filed in April 2008.

Political consultant Tom Shepard, who spearheaded Jerry Sanders’ two mayoral victories as well as the campaign to give San Diego’s mayor the executive powers of the city manager, said the city’s focus on pension issues since 2004 has had an upside — but at a cost.

“We live in a culture where we like to be able to blame people,” Shepard said. “I guess there’s plenty of blame to pass around, but the bottom line is we are where we are. We’re left with these problems, and we as a community have to decide what we’re going to do to move past them.”